Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable

With Wall Street firmly in panic mode this week, the S&P 500 and the NASDAQ Composite have suffered mightily. Moreover, the bloodbath has coincided with new 2022 highs and lows in the USD Index and the GDXJ ETF.

Thus, while a bullish short-term trading opportunity should help accelerate the recent profits from our short position in the junior miners, the medium-term fundamental outlook still signals more pain for the PMs over a longer time horizon.

To explain, Fed speakers made the rounds in recent days, and Kashkari, Barkin, Waller, Bullard, Bostic, Mester, Williams, and Clarida (former official) all sounded the hawkish alarm. Moreover, I noted on May 11 that political pressures should keep the Fed’s foot on the hawkish accelerator. I wrote:

The interesting fundamental development on May 10 was the subtle signals between the Fed and U.S. President Joe Biden. For example:

Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable - Image 1Source: The Wall Street Journal


Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable - Image 2Source: USA Today

Likewise, Biden said on May 10 that curbing inflation “starts with the Federal Reserve” and that “The Fed should do its job, and it will do its job. I’m convinced of that in my mind.”

Furthermore, San Francisco Fed President Mary Daly made that point loud and clear on May 12. She said:

“I expect financial conditions to tighten even more as we march through these rate increase and remove stimulus from the economy. I think we’ve made a good start on them already, but I would like to see continued tightening of financial conditions that would be consistent with bringing supply and demand back into balance.”

As a result, with her perception of a neutral rate at 2.5%, she supports 50 basis point rate hikes at the “next couple of meetings.”

Please see below:

Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable - Image 3Source: Bloomberg

Thus, despite all of the carnage unfolding on Wall Street, Fed officials are not backing down from their hawkish rhetoric. Moreover, I have warned on several occasions that rampant inflation is a catch-22. Either the Fed deals with the problem now or it ends up with a much larger recession down the road. As a result, Fed officials realize that the former is the lesser of two evils.

To that point, I've noted that the Bank of Canada (BoC) is the hawkish canary in the coal mine. The reason is that the BoC hiked rates in advance of the Fed, and the former sends roughly 75% of its exports to the U.S. Therefore, the two economies are increasingly intertwined and their monetary policy responses are often similar.

As such, BoC Deputy Governor Toni Gravelle said on May 12: "Our policy rate, at 1%, is too stimulative, especially when inflation is running significantly above the top of our control range. We need our policy rate to be at more neutral levels." For context, his neutral projection is between 2% and 3%. 

More importantly, though, he realizes that the ghosts of QE have the central bank confronting a lose-lose situation, and like the Fed, taming inflation could (will) put severe stress on "unsustainably high housing prices." Therefore, with prices surging during the pandemic in both the U.S. and Canada, the fundamentals are extremely similar.

Please see below:

Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable - Image 4Source: Reuters

In addition, there is still no fear in the financial markets. Despite some stocks plunging by more than 75% and some cryptocurrencies crashing to or near zero in recent days, investors are programmed to await the Fed put.

Please see below:

Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable - Image 5

To explain, the green line above tracks the Cboe Volatility Index (VIX), which calculates the implied volatility of the S&P 500 over the next 30 days. If you analyze the right side of the chart, you can see that the VIX hasn't even cracked 40 during this recent rout. 

As a result, investor psychology has the consensus so sure that the Fed will save the day that why panic like in 2008 and 2020? Instead, wait for the next round of QE. However, the fundamentals then are nothing like the fundamentals now. To explain, I wrote on May 4:

Following the global financial crisis (GFC), the Fed ran to the rescue whenever the stock market threw a tantrum. As such, investors with short memories assume that the post-GFC script is the right analog. Yet, they fail to realize that the year-over-year (YoY) percentage change in the headline Consumer Price Index (CPI) peaked at 3.81% in September 2011. Thus, the Fed could ease without worrying about stoking inflation.

Conversely, with the headline CPI at ~8.6% YoY now, the game has completely changed.

Please see below:

Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable - Image 6


The period had well-anchored inflation and unemployed citizens outnumbered job openings until 2018. That’s nothing like the current environment. Furthermore, notice how the spread’s outperformance helped spur the Fed’s most recent rate hike cycle?

Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable - Image 7

To explain, the green line above tracks the job openings spread, while the red line above tracks the U.S. federal funds rate. If you analyze the relationship, you can see that the spread’s move toward neutral was a hawkish indicator.

Likewise, with the spread positive and at an all-time high, the data alone justifies several rate hikes. However, as mentioned, we also have a YoY headline CPI that’s at its highest level since the 1980s. Thus, if investors assume the Fed lacks the ammunition to follow through with its hawkish promises, they should suffer the same fate as the “transitory” camp did in 2021/2022.

Therefore, Fed officials are (likely) smart enough to understand the epic economic consequences that would materialize from turning dovish. In a nutshell: commodity investors would be emboldened, and crude prices would likely surpass $150 a barrel.

Moreover, the U.S. dollar would be a fundamental casualty, which would only spur more import inflation on a currency-adjusted basis. As such, while battered bulls keep putting up the Bat-Signal, the Caped Crusader isn't on his way.

As further evidence, the Commodity Producer Price Index (PPI) soared by more than 2% month-over-month (MoM) on May 12. Moreover, with the data mirroring the 1970s on a year-over-year (YoY) basis, the post-GFC crowd has no idea that the Fed's hands are tied.

Please see below:

Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable - Image 8

To explain, the red line above tracks the YoY percentage change in the commodity PPI. If you analyze the right side of the chart, you can see that the metric has resumed its ascent and has increased by more than 21% YoY. Likewise, the current reading is only rivaled by the unanchored inflation of the 1970s.

Furthermore, if you analyze the vertical gray bars, notice how material YoY spikes in the commodity PPI often coincide with or are followed by recessions? In addition, what do you think will happen to the commodity PPI if the Fed turns dovish and resumes QE? As a result, the investors that assume that the Fed will right the ship don’t realize that the Titanic has already hit the iceberg. 

As a warning sign, the bond market has taken note of the potential ramifications. Case in point: the U.S. 10-Year Treasury yield has declined by ~36 basis points from its 2022 intraday high. As such, recession fears have some investors seeking safety in Treasury securities. However, the outcome is not a net positive for the PMs. To explain, I wrote on Apr. 20:

The next leg higher for the U.S. 10-Year real yield may occur for the opposite reasons. For example, I noted above that we don’t need nominal yields to rise for real yields to rise. Moreover, while the U.S. 10-Year Treasury yield was undervalued in 2021 and was poised to move higher, the U.S. 10-Year breakeven inflation rate is overvalued in 2022 and is poised to move lower. 

Please see below:

Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable - Image 9

To explain, the U.S. 10-Year breakeven inflation rate ended the Apr. 19 session at 2.93%, only slightly below the all-time high of 2.95% set in March. However, like the PMs, investors’ long-term inflation expectations remain in la-la land. 

With the Fed on a hawkish crusade to stifle demand and reduce inflation, the central bank can achieve this goal. The only question is how much economic pain officials are willing to tolerate to get the job done. 

Well, with the U.S. 10-Year breakeven inflation also declining by 36 basis points from its March high (2.95%), the U.S. 10-Year real yield is still at 0.25%. Furthermore, the Fed needs higher real yields to help curb inflation. As a result, with the central bank's hawkish crusade poised to further crush inflation expectations over the medium term, the fundamental development is profoundly bearish for the PMs.

Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable - Image 10

The bottom line? The Fed has created a generation of zombie investors that follow one mantra: buy the dip and the central bank will bail you out. However, they don't realize that the fundamentals present during those golden years couldn't be more different from the current state of play. As such, since Americans' living standards take precedence over market multiples, investors should learn this lesson the hard way over the next several months.

In conclusion, the PMs declined on May 12, as the bloodbath continued. However, with a short-term bounce likely on the horizon, a long position is justified from a risk-reward perspective. Conversely, since the medium-term outlook still remains bearish, we'll be mindful not to overstay our welcome.

What to Watch for Next Week

With more U.S. economic data releases next week, the most important are as follows:

  • May 16: Empire State manufacturing index

With inflation the main driver of Fed policy, monitoring the developments in New York State will provide important clues.

  • May 17: U.S. retail sales

With consumer spending a large driver of inflation’s fervor, it will be interesting to see if Americans are spending more on services than goods with the warmer weather upon us.

  • May 19: Philadelphia Fed manufacturing index

Like the data out of New York, the Philadelphia Fed’s regional survey will break down the growth, inflation, and employment developments in Pennsylvania.

All in all, economic data releases impact the PMs because they impact monetary policy. Moreover, if we continue to see higher employment and inflation, the Fed should keep its foot on the hawkish accelerator. If that occurs, the outcome is profoundly bearish for the PMs.

Let’s start today’s technical discussion with a quick check on copper prices.

Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable - Image 11

Copper recently CLEARLY invalidated another attempt to move above its 2011 high. This is a very strong technical sign that copper (one of the most popular commodities) is heading lower in the medium term.

The interest rates are going up, just like they did before the 2008 slide. What did copper do before the 2008 slide? It failed to break above the previous (2006) high, and it was the failure of the second attempt to break higher that triggered the powerful decline. What happened then? Gold declined, but silver and mining stocks truly plunged. The GDXJ was not trading at the time, so we’ll have to use a different proxy to see what this part of the mining stock sector did.

However, the situation looks different from the short-term point of view.

Even if copper is about to slide profoundly (which seems likely), it’s still likely to rebound as it reached its previous lows. In the past, we have seen such rebounds from analogous levels. I marked those situations with red rectangles.

Since PMs quite often align their short-term price moves with copper, a short-term correction here would be quite likely.

Let’s move back to the big picture.

Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable - Image 12

I previously commented on the above chart in the following way:

The Toronto Stock Exchange Venture Index includes multiple junior mining stocks. It also includes other companies, but juniors are a large part of it, and they truly plunged in 2008.

In fact, they plunged in a major way after breaking below their medium-term support lines and after an initial corrective upswing. Guess what – this index is after a major medium-term breakdown and a short-term corrective upswing. It’s likely ready to fall – and to fall hard.

So, what’s likely to happen? We’re about to see a huge slide, even if we don’t see it within the next few days.

And indeed, we did see a slide in the index. It’s down over 13%, even though the week is not yet over. The medium-term outlook remains extremely bearish, even though the above chart doesn’t have any specific short-term indications.

What has happened recently?

Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable - Image 13

Gold declined below my target area, but only slightly so. The yellow metal closed just several dollars below its 61.8% Fibonacci retracement based on the 2021-2022 rally. It also moved low enough, for this short-term decline to be very similar to the decline that we saw in March.

Speaking of March, please note that back then, gold started correcting once it briefly moved below its 38.2% Fibonacci retracement. History tends to rhyme, so it could indeed be the case that it now rallies given its yesterday’s small breakdown below another classic (61.8%) retracement.

What does it mean? It implies that the short-term (and only short-term) bottom is in or at hand. The breakdown below the rising and declining support lines and the above-mentioned Fibonacci retracement level was not confirmed, and unless the USD Index continues to soar, I don’t expect it to be confirmed. It seems quite likely that the latter will verify today’s breakout first, and soar only thereafter.

How high could gold correct? If gold bottomed on Thursday, then the 38.2% Fibonacci retracement level based on the March-May decline is at about $1,920, and this is also where we see one of the recent short-term highs. Consequently, I’d currently view this level as a short-term target. Of course, the situation might change and in that case, I’ll keep you informed.

By the way, please note that the situation in the mining stocks developed in tune with the strategy that I outlined a week ago. Quoting:

The precious metals sector moved higher yesterday, just as I had indicated on the grounds of the triangle-vertex-based technique. The “direct” trigger was provided by the Fed during the press conference. Powell cooled down some of the most hawkish expectations by stating that 0.75% rate hikes are not on the table.

Well, the reality is that the Fed’s comments are not that useful when estimating what’s going to happen. Remember when we heard so many times that inflation was under control and transitory? Exactly.

Still, regardless of whether 0.75% rate hikes will follow or not, the reality is that we saw a rally, and the key question is whether this rally is:

  1. the beginning of something much bigger,
  2. nothing special that will be followed by another wave lower soon,
  3. just a very brief pause within a decline to the previous target level (slightly above $37 in the GDXJ), and this target is going to be reached within the next few days.

Which one is most likely?

In my view, the first point is rather unlikely. The medium-term trend is down, just as the trends in the USD Index, and real interest rates are up.

You know what’s better than knowing the reply to a question about the future? (After all, it’s not possible to have a 100% certain answer to anything regarding the future.)

A strategy! A strategy is a plan for how to act in various future scenarios so that one knows what to do under all circumstances.

If scenario number 3 is going to happen and the target level is reached shortly (today or tomorrow), then the original expectation for PMs to start a counter-trend rally is likely to be realized. In this case, it makes sense to simply keep the current exit orders intact.

If scenario number 2 is going to happen and we’re about to see a bigger decline soon (perhaps to the previous 2022 lows in the GDXJ), then it would be better to move our exit prices much lower – perhaps to the 2022 lows, or even lower.

Here’s where it gets interesting. While it’s not clear at the moment which of the above scenarios will prevail, it will naturally clarify on its own as time passes.

If we get a sharp decline today or tomorrow, it will mean that scenario 3 is being realized, and therefore, we’ll get out of the short positions when the downside targets are reached, and we’ll enter long positions. However, if we don’t get a sharp decline today or tomorrow, it will likely mean that scenario 2 is being implemented and it will make sense to adjust our exit prices.

It's also possible that we will get a decline, but an indecisive one. In this case, I’ll elaborate further in the following analyses, as my preferred action will likely depend on what happens in other markets.

The previous week didn’t end with a decline that was sharp enough to trigger a rebound, so I moved the profit-take levels lower – and it turns out that it was a good decision, as junior miners declined to new 2022 lows. In fact, they moved to levels not seen since 2020.

Before looking at mining stocks, let’s take a look at gold from a broader point of view.

Let’s keep in mind that between 2020 and now, quite a lot happened, quite a lot of money was printed, and we saw a war breaking out in Europe. Yet, gold failed to rally to new highs.

In fact, it’s trading very close to its 2011 high, which tells you something about the strength of this market. It’s almost absent.

Truth be told, what we see in gold is quite in tune with what we saw after the 2011 top, and in particular, shortly after the 2012 top. The long-term gold price chart below provides details.

Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable - Image 14

It seems that if it weren’t for the war in Europe, gold wouldn’t have been able to move above $2,000 and instead it would have topped close to its previous highs, which provided strong resistance.

The extraordinary thing about that is that that’s exactly what happened in 2012. Gold moved higher but only until it reached its previous highs, which happened in the second half of 2012.

This time the RSI was a bit higher, but it was close to 70, just like what we saw in 2012.

The moves that we see in the long-term MACD indicator (lower part of the above chart) also confirm the analogy between now and 2012. The indicator is between 25 and 50, and it’s above its previous local top (early 2012 and mid-2021), and this local top formed after a profound decline from the ultimate top.

Yes, this time gold moved back to the previous high, but:

  1. This happened based on a geopolitical event (war in Europe) and geopolitically-driven rallies are generally unsustainable;
  2. When gold reached its previous highs, it also formed a profound weekly reversal, which formed on huge volume, and that’s very bearish.

So, the current outlook for gold is very bearish – the recent back and forth movement (the consolidation) appears analogous to the back-and-forth part of the decline that we saw right after the 2012 top. That was the beginning of a huge medium-term downswing.

There are also very interesting short-term takeaways from the above chart.

If the 2012-2013 is currently being replayed (at least to a significant extent), then let’s not forget that this decline initially took the shape of a back-and-forth decline with lower lows and lower highs (but there were notable short-term rallies within the decline).

One of those counter-trend rallies took place when gold touched its 40- and 60-week moving averages (marked with blue and red) in late 2012. The RSI was trading at about 50 at that time, and that’s more or less when we saw the clear sell signal from the MACD indicator (lower part of the above chart).

Let’s see how this applies to the current situation.

The 40- and 60-week moving averages are currently trading at ~$1,827 and ~$1,839, respectively. Consequently, they are quite close to recent short-term lows.

The RSI is at 49.48, so just below 50.

We just saw a clear sell signal from the MACD indicator.

Consequently, seeing a brief rally here or after an additional small decline would not be bullish – it would be a perfectly bearish confirmation of the 2012-now analogy.

Please note that gold’s closing at $1,824.60 yesterday was very much in tune with what happened in 2012 / 2013 with regard to gold’s 60-week moving average. Consequently, the long-term gold chart tells us that seeing a correction here would be quite likely and something normal that wouldn’t change the bearish implications for the medium term.

It seems that gold is right at or “almost” at its very short-term downside target, and we can see the same thing in the case of the silver market.

Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable - Image 15

Just like gold, silver hit my target area and then moved slightly below it.

The short-term target is at the early-2020 high, close to the $19 level.

Will silver drop there without looking back? It might, but it seems more likely that we’ll see some kind of rebound here. If silver invalidates its breakdown below the recent lows, it will serve as a short-term buy signal.

How high could silver go? In an analogy to gold, silver could correct approximately 38.2% of the recent decline. Interestingly, just like in the case of gold, this retracement coincides with the recent immediate-term top, which makes it more reliable as a target.

Please note that the above would be in tune with how silver corrected in early 2020 after the first part of the decline. It erased a bit over 38.2% of the initial decline and declined from there.

After the correction is over, I expect the decline to continue, and I think that the next move lower will be powerful.

In fact, gold is not the only precious metal that is repeating its 2012 performance right now, and you can see more details on silver’s long-term chart.

Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable - Image 16

As you can see on the above chart, silver corrected about 50% of the previous downswing, and this correction ended at about $30, a long time ago. Ever since, silver has been declining, and even the outbreak of war in Europe didn’t make silver rally above that level.

On the above chart, you can see how silver first topped in 2011, then declined and formed another top at the cyclical turning point. Next, it declined once again – to the previous lows. After that, silver rallied (in 2012 and 2022), and it topped between its 50-week moving average (marked in blue) and the previous top. Now silver is declining in a back-and-forth manner (you can see it more clearly on the previous short-term silver chart).

Back in 2012, these were just the early days of a gargantuan decline, and the same appears likely to be the case this time. Interest rates are going up after all, and the Fed is determined to quench inflation.

Let’s not forget that rising interest rates are likely to negatively impact not just commodities, but practically all industries. This will likely cause silver’s price to decline profoundly, as silver’s industrial demand could be negatively impacted by lower economic growth (or a decline in economic activity).

Besides, please note that silver didn’t even manage to rally as much as copper (which tried to move to new highs recently) or most other commodities, thus being rather weak.

Consequently, it seems that silver will need to decline profoundly before it rallies (to new all-time highs) once again. Still, a short-term corrective upswing appears likely to be upon us or just around the corner.

Having said that, let’s take a look at what happened in junior mining stocks.

I previously commented on GDXJ’s performance in the following way:

(…) As gold rallied yesterday, and it moved a bit lower once again in today’s pre-market trading (~$7 at the moment of writing these words), its likely forming a broader bottom here. And since stocks (S&P 500 futures) are trading lower (they are down by 0.5%) in today’s pre-market trading, it seems that junior miners are about to get another bearish push.

Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable - Image 17

And as stocks are likely to move a bit lower before correcting, so are junior miners. This means that practically everything that I wrote about their performance and outlook remains up-to-date – the market simply agreed.

In short, just like in the case of silver, I decided to move our exit prices lower – a bit below the previous lows.

Why? Because that’s where there’s the next really strong support – provided by the 61.8% Fibonacci retracement and because it seems that the general stock market will decline a bit more before correcting.

I mean, I expected juniors to decline along with the general stock market, but the huge size of juniors’ decline was more than I had expected to happen during just one session compared to what happened in the S&P 500.

If stocks have more to fall (much more than just a repeat of yesterday’s decline) and gold could repeat its yesterday’s decline, it seems that junior miners could more than repeat their slide. Since they fell by over $3 yesterday, juniors can now decline by at least another $3. This would bring them below their previous lows and below the previous target of about $37.

In fact, given the strength of the momentum, I wouldn’t even rule out the scenario in which miners slide to ~$34. Then again, let’s not forget that miners tend to show some kind of strength before rallying, so the pace of their decline would be likely to diminish before the turnaround. Therefore, expecting the sharpness of the decline to continue all the way down is not realistic. Consequently, ~$36 seems more realistic as a short-term downside target than $34 is.

Besides, the GDXJ’s 4-hour chart also suggests a move to this area.

Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable - Image 18

Consolidations tend to be followed by price moves that are similar to the moves that preceded them. Applying this to the letter provides us with a target that’s slightly below $36.

Please note how perfectly my above indication played out. The GDXJ ETF declined in near-perfect symmetry to how it declined before the late-April-early-May consolidation.

What’s next? Well, since the target was reached and the GDXJ moved a little below its 61.8% Fibonacci retracement (and the previous lows), I wouldn’t be surprised to see a small rally that then turns into a bigger (but still of short-term nature) rally as the breakdowns below the previous lows and the 61.8% retracement are invalidated.

Moreover, the GDXJ provides us with another specific indication that the short-term bottom is in, or at hand. Namely, it formed a bullish hammer reversal candlestick and it materialized on relatively big volume. Now, the GDXJ could still decline on even bigger volume, but what we already saw was big enough to be viewed as something that would confirm a reversal.

And junior miners did reverse before the end of the day.

The RSI is below 30, which supports the bullish narrative for the near term.

How high can the GDXJ correct? To about $41.

That’s where we have the 38.2% Fibonacci retracement and the previous short-term low.

I realize that this target might seem far away, but please consider the recent volatility. $41 is where the GDXJ was trading just several days ago.

Besides, if the situation is at least somewhat similar to early 2020, then the corrective upswing can indeed be quite sharp.

Also, let’s not forget about the forest while looking at individual trees. By that, I mean looking at how gold stocks perform relative to gold. That’s one of the major indications that the current situation is just like what we saw at the 2012 top.

I previously wrote the following:

Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable - Image 19

Gold stocks (GDX, GDXJ, and HUI Index) have recently been quite strong relative to gold. OK, but is this necessarily bullish? It might be, until one considers the fact that we saw the same thing at the 2012 top! This changes everything, and it does so, because the links between now and that top are almost everywhere: in gold, in silver, in gold stocks, and even in their ratios.

As it turns out, the gold stocks to gold ratio is behaving almost identically as it was behaving at the 2012 top in the precious metals sector.

In both cases, the ratio moved below the rising medium-term support line, then formed a double-bottom below the line, and invalidated the breakdown, which resulted in a counter-trend rally. The rally ended shortly after the ratio moved above its 200-day moving average (marked in red). That’s what happened recently. What happened next in 2012? The decline not only continued – it accelerated!

Consequently, the recent action in the ratio is not really bullish. In other words, the fact that gold stocks were recently (in the short run only) strong relative to gold doesn’t make the medium-term outlook for the precious metals sector bullish. However, it remains bearish.

Interestingly, the ratio itself moved to its declining resistance line (and it even moved slightly above it, but the move was too small to be viewed as reliable), indicating that the corrective upswing might already be over or almost over. We get the same indication from the RSI indicator. It’s not above 70, but in the case of most local tops, the RSI didn’t have to move above 70. It just moved to more or less the same levels – I marked it with a horizontal blue line.

The above is actually a confirmation of the analogy that is visible directly in all three key components of the precious metals sector: gold, silver, and mining stocks.

Indeed – the HUI to gold ratio moved lower recently, clearly invalidating the breakout above its declining resistance line – in line with my previous expectations.

The decline didn’t stop there – the ratio actually managed to decline below its rising support line, likely surprising those who didn’t see the analogy to 2012-2013 (but if you’ve been reading my analyses for some time – you did).

The implications are extremely bearish, as it appears that the 2012-2013 decline will now be repeated to a considerable extent. Still, given this similarity, it seems that we might see a short-term correction, just like the one that we did in the early part of the 2012 decline.

I already discussed the analogies to 2012-2013 in gold and silver, so let’s take a look at the analogy in the HUI Index – a proxy for gold stocks.

Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable - Image 20

If you look at the areas marked with red circles (especially now, 2012/2013, and 2008), you’ll notice that they are very similar. These are the sizable short-term rallies that we saw after / in the final parts of the broad head-and-shoulders patterns. 

The moves were quite sizable – the 2012 rally was even bigger than the current one, even though there was no war in Europe at that time. 

Based on how broad the pattern is and the self-similarity present in gold, it seems that the analogy to what happened in 2012 is most important right now.

Looking at the moving averages, we see that the 50-week moving average (blue) and 200-week moving average (red) performed quite specifically in late 2012, and we see the same thing this year.

The distance between 50- and 200-week moving averages is currently narrowing, while the former is declining. Back in 2012, the top formed when the HUI rallied above its 50-week moving average, which just happened once again.

The RSI indicator (above the price chart), based on the HUI Index’s weekly chart, provides us with another confirmation of the analogy, and the same goes for the stochastic indicator (below the price chart). The former was just close to the 70 level – exactly what we saw at the 2012 top, and the latter was above 90 – again, something that we saw at the 2012 top.

As history tends to rhyme, gold stocks are likely to slide, similarly to how they declined in 2012 and 2013.

Still, if the general stock market slides, and that appears likely for the following weeks and months, then we might have a decline that’s actually similar to what happened in 2008. Back then, gold stocks declined profoundly, and they have done so very quickly.

Please note that the sharpness of the recent decline in miners was even bigger than the one that we saw in 2008!

The dashed lines that start from the recent prices are copy-paste versions of the previous declines that started from the final medium-term tops. If the decline is as sharp and as big as what we saw in 2008, gold stocks would be likely to decline sharply, approximately to their 2016 low. If the decline is more moderate, then they could decline “only” to 120-150 or so. Either way, the implications are very, very, very bearish for the following weeks.

Also, we saw a fresh sell signal from the weekly stochastic indicator, which (unlike its 4-hour version) is quite efficient. This is a very bearish development for the medium term. After all, the last two times we saw this signal were at the 2021 and 2020 tops.

Let’s take a brief look at the stock market indices.

Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable - Image 21

The technical picture in the case of world stocks remains extremely bearish, and my previous comments on it were just confirmed. Here’s what I’ve been writing about the above chart for quite a few weeks now:

World stocks have already begun their decline, and based on the analogy to the previous invalidations, the decline is not likely to be small. In fact, it’s likely to be huge.

For context, I explained the ominous implications on Nov. 30. I wrote:

Something truly epic is happening in this chart. Namely, world stocks tried to soar above their 2007 high, they managed to do so, and… they failed to hold the ground. Despite a few attempts, the breakout was invalidated. Given that there were a few attempts and that the previous high was the all-time high (so it doesn’t get more important than that), the invalidation is a truly critical development.

It's a strong sell signal for the medium - and quite possibly for the long term.

From our – precious metals investors’ and traders’ – point of view, this is also of critical importance. All previous important invalidations of breakouts in world stocks were followed by massive declines in mining stocks (represented by the XAU Index).

Two of the four similar cases are the 2008 and 2020 declines. In all cases, the declines were huge, and the only reason why they appear “moderate” in the lower part of the above chart is that it has a “linear” and not a “logarithmic” scale. You probably still remember how significant and painful (if you were long, that is) the decline at the beginning of 2020 was. 

Now, all those invalidations triggered big declines in the mining stocks, and we have “the mother of all stock market invalidations” at the moment, so the implications are not only bearish, but extremely bearish.

World stocks have declined below their recent highs, and when something similar happened in 2008, it meant that both stocks and gold and silver mining stocks (lower part of the chart) were about to slide much further.

The medium-term implications for mining stocks are extremely bearish.

Let’s take a look at the U.S. stock market. I previously commented on them in the following way:

Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable - Image 22

Despite yesterday’s attempt to move higher, stocks closed the day below the neck level of the head and shoulders pattern for the third consecutive day. The bearish H&S pattern was confirmed, just as I expected.

The implications are bearish and while the target based on this formation is slightly below 3,500, it wouldn’t surprise me to see a rebound from about 3,800 – that’s where the 38.2% Fibonacci retracement is located. I previously wrote about it in the following way:

Is there any nearby support level that would be strong enough to stop this short-term decline? Yes: it’s the 38.2% Fibonacci retracement level based on the 2020-2022 rally.

Back in 2020, the very first decline erased 50% of the preceding rally, but back then the market was much more volatile than it is right now, so it’s understandable.

If we see a decline to the 38.2% Fibonacci retracement and then a comeback to the previously broken neck level of the head and shoulders pattern, it would fit practically everything that I wrote above and in the previous days / weeks.

It would trigger another immediate-term decline in silver and mining stocks in the near term that would be followed by a (quite likely tradable) rebound.

So, it seems that the general stock market is quite close to its near-term target area, but not yet at it – another move lower appears likely.

The S&P 500 declined yesterday, but then reversed, and erased almost the entire daily rally. It’s been moving up in today’s pre-market trading as well. So, did stocks already form their short-term bottom? It’s quite likely, but not certain.

The above-mentioned 38.2% Fibonacci retracement is at ~3815, and yesterday’s intraday low was ~3859. This target was not reached, but stocks moved very close to it. However, a different support level was (almost) reached. The late-March 2021 low is at 3853.50, so we could say that stock moved (almost) to it, and this could have triggered the rebound.

This could have been the final (short-term) bottom, but we might see another immediate-term decline that is then followed by a more visible corrective upswing.

Still, given how excessively oversold mining stocks are right now (from the short-term point of view), it didn’t seem justified to keep the short position intact or to wait for opening long positions while waiting on stock to decline even more. After all, the GDXJ repeated its initial part of the decline almost to the letter.

From a broader point of view, let’s keep in mind what happened in the previous cases when stocks declined profoundly – in early 2020 and in 2008. Miners and silver declined in a truly epic manner, and yes, the same is likely to take place in the following months, as markets wake up to the reality, which is that the USD Index and real interest rates are going up.

Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable - Image 23

Speaking of the USD Index, after invalidating the breakout below the multi-year head-and-shoulders pattern, the USDX was poised to soar, just like I’ve been expecting it to do for more than a year, and that’s exactly what it did.

The RSI is currently above 70, but since the USDX is in a medium-term rally and is already after a visible correction, it can rally further. Please note that we saw the same thing in 2008 and 2014. I marked the corrections with blue rectangles.

Still, the USD Index is now practically right at its next strong resistance – at about 104.

I previously wrote the following about this target:

It doesn’t mean that the USD Index’s rally is likely to end there. It’s not – but the USDX could take a breather when it reaches 104. Then, after many investors think that the top has been reached as the USDX corrects, the big rally is likely to continue.

The important detail here is that the consolidation close to the 104 level doesn’t have to be really significant (perhaps 1-2 index points of back-and-forth movement?) and it definitely doesn’t have to take long. The interest rates are going higher, and investors appear to have just woken up to this reality – it will take some time before everyone digests what’s going on. Before the late-reality-adopters join in, the USD Index could be trading much, much higher.

Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable - Image 24

Back in 2014, when the USD Index approached its previous highs (close to 89), it consolidated so quickly that it’s almost not visible on the above chart – it took just a bit more than a week (from Dec. 8, 2014 – 89.56 to Dec. 16, 2014 – 87.83).

I previously wrote the following:

We could see something similar this time – and as the USD Index corrects for about a week, the same thing could take place in other markets as well: stocks and PMs. If junior miners were after a very sharp slide at that time, they would be likely to correct sharply as well.

I would like to add one important detail. Back in 2014, the USD Index didn’t correct after reaching its previous high. It corrected after moving above it. The higher of the highs was the March 2009 high, at 89.11.

The higher of the recent highs is at 103.96 right now, so if the analogy to 2014 is to remain intact, the USD Index could now top at close to 104.5 or even 105.

That’s exactly what happened recently. Yesterday, the USD Index moved to 104.96, which is in perfect tune with what I wrote above. Consequently, it seems that we could now see a move to about 103-103.5, after which USD’s rally could continue.

The opposite is likely to take place in the precious metals sector. Gold, silver, and mining stocks are likely to rally in the near term, and then – after topping at higher levels – their decline would continue.

Naturally, as always, I’ll keep you – my subscribers – informed.

Overview of the Upcoming Part of the Decline

  1. It seems to me that the short-term decline in the precious metals market is over or about to end, and we’ll see a quick rebound from the current levels soon.
  2. After the above-mentioned correction, we’re likely to see another big slide, perhaps close to the 2021 lows ($1,650 - $1,700).
  3. If we see a situation where miners slide in a meaningful and volatile way while silver doesn’t (it just declines moderately), I plan to – once again – switch from short positions in miners to short positions in silver. At this time, it’s too early to say at what price levels this could take place, and if we get this kind of opportunity at all – perhaps with gold close to $1,600.
  4. I plan to exit all remaining short positions once gold shows substantial strength relative to the USD Index while the latter is still rallying. This may be the case with gold close to $1,400. I expect silver to fall the hardest in the final part of the move. This moment (when gold performs very strongly against the rallying USD and miners are strong relative to gold after its substantial decline) is likely to be the best entry point for long-term investments, in my view. This can also happen with gold close to $1,400, but at the moment it’s too early to say with certainty.
  5. The above is based on the information available today, and it might change in the following days/weeks.

You will find my general overview of the outlook for gold on the chart below:

Much to Gold’s Dissatisfaction, the USDX Seems Unstoppable - Image 25

Please note that the above timing details are relatively broad and “for general overview only” – so that you know more or less what I think and how volatile I think the moves are likely to be – on an approximate basis. These time targets are not binding or clear enough for me to think that they should be used for purchasing options, warrants or similar instruments.


Summing up, it seems that we are about to see a short-term corrective upswing in the precious metals sector (after another very short-term move lower), even though the medium-term trend remains clearly down.

The medium-term downtrend is likely to continue shortly (perhaps after a weekly or a few-day long correction). As investors are starting to wake up to the reality, the precious metals sector (particularly junior mining stocks) is declining sharply. Here are the key aspects of the reality that market participants have ignored:

  1. rising real interest rates,
  2. rising USD Index values.

Both of the aforementioned are the two most important fundamental drivers of the gold price. Since neither the USD Index nor real interest rates are likely to stop rising anytime soon (especially now that inflation has become highly political), the gold price is likely to fall sooner or later. Given the analogy to 2012 in gold, silver, and mining stocks, “sooner” is the more likely outcome.

It seems that our profits from short positions are going to become truly epic in the coming months.

For now, I’m adjusting the exit price levels. Please note that they are “binding exit prices”, which means that I think that exiting the short positions without an additional (manual) confirmation from me is a good idea. I think that once these short positions are closed, entering long ones (100% of the regular position size) is also a good idea. If one wants to use a leveraged ETF for this long trade, the JNUG might be worth considering. However, it seems that in most cases, simply using the GDXJ would be sufficient (I’m writing about 100% of the regular position size, not 200% or 300% as I am right now in the case of the short positions). Then again, it’s your capital, and you can do with it whatever you want and are comfortable with.

Of course, if you’re not comfortable with such short-term trading, you can ignore this quick trade and focus on the bigger downturn.

After the final sell-off (that takes gold to about $1,350-$1,500), I expect the precious metals to rally significantly. The final part of the decline might take as little as 1-5 weeks, so it's important to stay alert to any changes.

As always, we'll keep you  our subscribers  informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full speculative long positions (100% of the full position) in junior mining stocks are justified from the risk to reward point of view with the following binding exit profit-take price levels:

Mining stocks (price levels for the GDXJ ETF): binding profit-take exit price: $40.96; stop-loss: none (the volatility is too big to justify a stop-loss order in case of this particular trade)

Alternatively, if one seeks leverage, we’re providing the binding profit-take levels for the JNUG (2x leveraged). The binding profit-take level for the JNUG: $56.68; stop-loss for the JNUG: none (the volatility is too big to justify a SL order in case of this particular trade).

For-your-information targets (our opinion; we continue to think that mining stocks are the preferred way of taking advantage of the upcoming price move, but if for whatever reason one wants / has to use silver or gold for this trade, we are providing the details anyway.):

Silver futures downside profit-take exit price: $22.88

SLV profit-take exit price: $21.28

AGQ profit-take exit price: $32.18

Gold futures downside profit-take exit price: $1,909

HGU.TO – alternative (Canadian) 2x leveraged gold stocks ETF – the upside profit-take exit price: $19.68

HZU.TO – alternative (Canadian) 2x leveraged silver ETF – the upside profit-take exit price: $12.09

Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash

Insurance capital (core part of the portfolio; our opinion): Full position

Whether you already subscribed or not, we encourage you to find out how to make the most of our alerts and read our replies to the most common alert-and-gold-trading-related-questions.

Please note that we describe the situation for the day that the alert is posted in the trading section. In other words, if we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices to decide whether keeping a position on a given day is in tune with your approach (some moves are too small for medium-term traders, and some might appear too big for day-traders).

Additionally, you might want to read why our stop-loss orders are usually relatively far from the current price.

Please note that a full position doesn't mean using all of the capital for a given trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.

As a reminder - "initial target price" means exactly that - an "initial" one. It's not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade), we will refer to these levels as levels of exit orders (exactly as we've done previously). Stop-loss levels, however, are naturally not "initial", but something that, in our opinion, might be entered as an order.

Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main markets that we provide these levels for (gold, silver and mining stocks - the GDX ETF), the stop-loss levels and target prices for other ETNs and ETF (among other: UGL, GLL, AGQ, ZSL, NUGT, DUST, JNUG, JDST) are provided as supplementary, and not as "final". This means that if a stop-loss or a target level is reached for any of the "additional instruments" (GLL for instance), but not for the "main instrument" (gold in this case), we will view positions in both gold and GLL as still open and the stop-loss for GLL would have to be moved lower. On the other hand, if gold moves to a stop-loss level but GLL doesn't, then we will view both positions (in gold and GLL) as closed. In other words, since it's not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can't provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the signs pointing to closing a given position or keeping it open. We might adjust the levels in the "additional instruments" without adjusting the levels in the "main instruments", which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets. We are already working on a tool that would update these levels daily for the most popular ETFs, ETNs and individual mining stocks.

Our preferred ways to invest in and to trade gold along with the reasoning can be found in the how to buy gold section. Furthermore, our preferred ETFs and ETNs can be found in our Gold & Silver ETF Ranking.

As a reminder, Gold & Silver Trading Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent, we will send you an additional small alert before posting the main one.

Thank you.

Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief